Part 1 - The Big Piece of the Pie
A challenge that companies both new and old face is getting a handle on product cost when you would like to know it most - before you put forth the effort to design and produce it. It sounds crazy, to estimate how much something will cost before you even design it, but it’s not difficult. Here's How.
The first step is to realize an interesting fact about how cost is distributed for many products - that is, most of the time 70-80% of the cost is tied up in 20-30% of the components (number of parts). So, all you need to do to get a good start on your estimate is to focus on those high-cost components. Knowing this makes cost estimation a much more approachable task.
Your napkin sketch
Pull out whatever you have so far for your product description (napkin sketch, prototype) as your reference. You should have already determined its size, basic construction, features, etc. Next, determine the major components of the design. For example, what does it need for motors, actuators, control boards, touch screen, monitor, power supply, structural components, etc.? Again, these are the components that will determine the majority of the cost. For these components, which will often be supplied by a vendor, just call to get quotes. While you are at it, be sure to get prices for various annual quantities so you know how the price will change as you scale up production (e.g. 500, 2000, 10,000 per year). Build a spreadsheet to track this information (here is a BOM template!).
For custom parts, there are a few creative ways to estimate the cost. Take a sheet metal part for example: create a sketch of the final part with bends and include some overall dimensions, take a guess at the thickness by talking to the vendor or finding a similar part and measure its thickness. The same idea works for many other manufacturing methods such as injection molded plastic, castings, etc. – the main cost drivers are how much material is used and the part’s projected area (for molding), all of which can be ball-parked by a good vendor from your sketch / dimensions / notes.
Another really slick technique is to go shopping for “similar-to” items. For example, if you have a product that will be sold in a hardware store, go shopping at Home Depot and see what you can find that’s made from the same materials, has the same functions, or might be about the same size as your envisioned product. If you find a good match, buy it, disassemble and send representative parts (or pictures with measurements - if you are not happy with your sketching skills) to vendors to quote. Words work too, not everything has to be represented by a good drawing (it’s true ID folks!). Add a written description or notes to a photo to get the point across. Note that the more thorough you are in communicating a clear set of requirements, the more accurate the quote will be. Uncertainty by suppliers is manifested in a buffer in their quote, so take that into consideration.
I love taking products apart – you can learn so much from what’s inside, or, more importantly for this exercise, where it’s manufactured. Remember the high-price tag items mentioned earlier? Well, most will have the manufacturer’s name molded-in or labeled with a decal; this makes reverse-engineering suppliers a piece of cake! If you look closely, you may also be able to spot part or model numbers to make it even easier. These days, most plastic parts will have a recycling number molded on an inner surface so you can easily tell what resin was used. Search around, there are websites such as iSuppli that provide detailed cost information for electronics.
Once you get some practice playing detective, you should be able to determine your cost with an 80% confidence level, and it will be very easy to keep refining and tracking changes with the spreadsheet you started.
In Part 2 – We’ll discuss how to estimate the rest of the product, the bits and pieces. Sign up for the RSS feed or email to be notified when it is posted!
Let us know if you have any questions on the post above or need help with your particular estimating project!
Do you have any tips for product cost estimation? Please comment below!